U.S. Leveraged Buyout Market From 1980-2002

The leveraged buyout market rose to prominence in the late 1980s when private equity firms such as Kohlberg Kravis & Roberts ("KKR") and Fortsmann Little were consistently making headlines with large buyouts including the largest leveraged buyout ever, KKR's $25 billion buyout of RJR Nabisco in 1988. The success of these financial sponsors (i.e., private equity firms) and others in completing transactions and earning favorable returns attracted many other parties to the industry. There are currently hundreds of financial sponsors focused on buying companies of all sizes across many industries.

With an estimated $120 billion in uninvested capital, hundreds of financial sponsors, and a difficult M&A environment, private equity firms currently face a challenging environment. As the buyout community moves forward in this competitive environment, we think it is appropriate to look back at leveraged buyouts over the last 22 years. In this M&A Insights article, we review the trends and drivers of the U.S. leveraged buyout market over the 1980-2002 period.

The data and our analysis revealed the following about the leveraged buyout market over the 1980-2002 period:

Leveraged Buyout Volume Peaked in the Late 1980s

From 1980-2002, SDC reported leveraged buyouts totaling $505 billion. Approximately 56%, 29% and 15% of the leveraged buyout volume was in the 1980s, 1990s and 2000s (2000-2002), respectively. The period from 1985-1989 was the most active, accounting for approximately 51% of the deal volume. Leveraged buyout volume declined significantly in the early 1990s and then increased in the late 1990s and 2000s.
The Late 1980s was the Period with the Greatest Number of Leveraged Buyouts
Over the period 1980-2002, SDC reported 4,310 leveraged buyouts. Between 1985 and 1989, there was a total of 1,290 leveraged buyouts, averaging 258 per year. This compares to an average of 216 and 235 per year in the 1990s and 2000s, respectively. Unlike the case with the volume of leveraged buyouts, the annual number of leveraged buyouts from 1990-2002 was relatively flat.

Competition in the Leveraged Buyout Market has Continued to Increase
According to data published by Buyouts, the number of financial sponsors increased from 229 in 1994 to 346 in 2001. While we believe the trend is accurate, we currently track more than 500 private equity firms.
The Majority of Leveraged Buyouts were with Small to Midsized Companies
From 1980-2002, 79% of leveraged buyouts had a total deal value of $250 million or less, and 61% had a total deal value of $100 million or less. The average and median size of leveraged buyouts was the highest in the late 1980s. Although average and median deal size in the 1990s and 2000s was not as high as in the late 1980s, the average and median deal size did gradually trend upward.

The Majority of Leveraged Buyouts were with Manufacturing Businesses
Over the 1980-2002 period, almost 50% of leveraged buyouts (by number of deals and volume) were with manufacturing businesses. Approximately 25% (by number of deals and volume) were with service businesses.
Leveraged Buyouts Represented a Relatively Small Percentage of the Overall M&A Market

From 1980-2002, leveraged buyouts represented 5% of the total M&A volume and 4% of the total number of M&A transactions. Over this period, annual leveraged buyout volume and the number of transactions were generally lower than 4% of the total M&A market except for the late 1980s when the volume and number of transactions were in the 20% to 30% and 9% to 10% range, respectively.

The Leveraged Buyout Market Outside the United States has Grown in Importance in Recent Years
From 1980-2002, leveraged buyouts outside of the United States accounted for approximately 39% of the global leveraged buyout volume. Leveraged buyouts outside of the United States accounted for 10%, 50% and 67% of global leveraged buyout volume in the 1980s, 1990s and 2000s, respectively.
We reviewed a variety of data in order to determine what was driving these trends in the leveraged buyout market over the 1980-2002 period. The data revealed clear drivers for the high level of leveraged buyout activity of the late 1980s. The data also provided insight into the higher leveraged buyout volume in the late 1990s versus the early 1990s. The following drivers were evident from the data we examined:

Leverage–The lending multiples (as measured by total debt/EBITDA) peaked at more than 8.5x in the late 1980s, coinciding with the period of the greatest leveraged buyout activity. The lower lending multiples of the 1990s and 2000s (as compared to the 1980s) resulted in lower leveraged buyout activity. As the lending multiples increased through the mid-1990s, so did the value of leveraged buyouts (but not the number of deals). Over the 1997-2002 period, lending multiples decreased while the volume of leveraged buyouts generally increased and the number of leveraged buyouts did not show a trend.
Valuations–The high leveraged buyout activity of the late 1980s was also the period when overall M&A valuations were relatively low. The combination of relatively low valuations and high lending multiples made the late 1980s an attractive period for leveraged buyouts. However, this same trend was not evident after the 1980s. That is, leveraged buyout volume was not higher during periods of lower valuations. In fact, the opposite trend is evident during periods in the 1990s.

Availability of Targets–There were significantly more leveraged buyouts in which the target was a corporate divestiture or a public company during the late 1980s than in the 1990s and 2000s. The high level of leveraged buyouts in which the target was a corporate divestiture likely reflected the favorable environment (i.e., leverage and valuations), combined with a time when corporations were focusing on core competencies and disposing of non-core assets. We suspect that the fallout in going private transactions in the 1990s and the 2000s (i.e., transactions in which the target was a public company) was primarily driven by corporate law and regulatory developments. In addition, the initial public offering market was much more active in the 1990s and 2000s, presenting sellers with an attractive exit alternative to selling to financial sponsors and strategic buyers.
Availability of Capital–The availability of buyout capital increased in the late 1990s and 2000s resulting in more participants entering the industry. This increase in available capital was likely a driver of the increase in leveraged buyout volume in the late 1990s and 2000s versus the early 1990s.

In Part II, we review the trends in the leveraged buyout market over the 1980-2002 period. In Part III, we review the key drivers of the leveraged buyout market over 1980-2002. Finally, in Part IV, we provide some concluding comments about the leveraged buyout market including some of the strategies private equity firms are considering and/or adopting.

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